A mortgage is nothing more than a loan. Like most loans, it requires some collateral (the thing you’ll lose if you don’t pay the lender back). In this case, the collateral is a house or apartment you want. A bank lends you money to buy a house, and if you don’t pay them back when they say to, they get to seize the house, put you out on the street, and sell your home so they can get their money back.

It could be worse. Kneecaps could be involved.

Almost all home purchases involve a combination of money you cough up (the down payment) and money supplied by a bank (the mortgage). Now, the standard advice is that you should have enough of your own cash to pay for 20% of the house you’re planning on buying upfront as a down payment. Doing so gives you a nice chunk of equity (the portion of the house you own) right off the bat and will mean your lender won’t charge you private mortgage insurance (PMI). PMI is something banks require (and you pay for) when they think there’s a possibility you could default on the loan. People who put less than 20% down automatically fall into this category, and they wind up paying an extra $50 or more per month on top of their regular monthly mortgage payment.

Not all mortgages are the same. Here’s how the most common ones break down:

Length of Term – This means how long you’ll be paying the bank back. Most mortgages have a 30-year term, but there are mortgages that are for 20, 15 or 10 years. The shorter the term, the higher the payment, since you have less time to pay it off. On the other hand, the shorter the loan, the less interest you’ll pay over the life of the mortgage.

There are also longer terms, such as 40 years, but you should avoid them—they’re designed to lure people in with low monthly payments, but since they’re so long, you’ll pay gobs more in interest over the length of the loan.

Fixed Rate vs. Adjustable Rate Mortgages (ARMs) – A fixed-rate mortgage is a loan with the exact same monthly payment for the life of the loan. An adjustable-rate mortgage has a rate that is usually fixed for a specified time and then adjusts, either annually, semi-annually or even monthly. Most adjustable-rate mortgages assume a 30-year term.

If you see a “5/1 ARM,” that means that the rate is fixed for five years, and then adjusts once every year for the next 25 (the adjustment depends on what the prime rate is on the day of the adjustment. Bank set their own prime rates, although the Federal Reserve targets a specific rate and the majority of banks follow suit.) ARMs have lower rates than fixed-rate mortgages at the beginning of their term, but they’re riskier. If interest rates are higher when the fixed-rate expires, your monthly payment can go through the roof. That’s what happened to many of the borrowers caught up in the sub-prime mortgage crisis that began in 2007.

Another thing about ARMs: If you don’t plan on living in your place for a very long time, they can be a good idea. A 7/1 ARM has a fixed rate for seven years. Let’s say that, after living in your place for six years, you decide you want to move. And let’s say you successfully sell your house for $400,000, and at the time of the sale, you still have $325,000 left on your mortgage. You write a check to the bank for $325,000 and pocket the rest. In this scenario, your mortgage interest rate never changed, as it was fixed for seven years, and you sold your house after six.

Interest-Only Mortgages – With most mortgages, you’re paying off the interest and paying down the principal at the same time. Interest-only mortgages (“I/O mortgages”) allow you to make payments only on the interest for a fixed period of time (usually between three and 10 years). This means low, low monthly payments at the beginning of your loan. But after the interest-only period expires, you’ll need to make payments on the interest and principal, which will raise your monthly payment, sometimes very sharply.

Also keep in mind that most I/O mortgages are also ARMs, so in addition to having to pay principal after the I/O period ends, your interest rate may go up as well, raising your monthly payment even higher.

Payment-option ARMs – This is probably the riskiest type of mortgage out there. With this loan, you don’t have to pay down the principal, like an I/O, but you also don’t have to pay all the interest, either.

What this means is an incredibly low monthly payment, but it also means that any interest you don’t pay off at first will be added to your loan balance. This can result in a nasty little scenario called “negative amortization,” which is just a fancy way of saying you’re screwed: Because you didn’t pay off all the interest when it was originally due, and because that unpaid interest is tacked on to your principal, the amount of money you owe the bank can actually grow over time, not shrink.

So why would anyone want one of these loans? Well, they’re cheap…at first. With a super-low monthly payment, you can either spend very little to get the same size loan as say, a 30-year fixed-rate mortgage, or you can spend the same amount each month as a 30-year fixed mortgage and borrow a lot more money. If you were dead certain that your home’s value was going to skyrocket for the time that you owned it, and you planned on selling before the loan came due, sure, an option ARM might work, but it’s almost always better to go with something where you’re certain to be paying off at least a bit of principal each month.

Here are a few more terms you’re going to hear a lot about:

Mortgage Points – Towards the end of the loan process, you’ll be asked if you want to buy points. One point costs one percent of the loan. A point usually lowers the interest rate by around .25% (one quarter of one percentage point), thereby lowering your monthly payment.

Whether or not this is the right move for you depends on how long you plan on living in your house. Say you had a $200,000 mortgage with a 6% interest rate. Your monthly payment would be $1,199. Buying one point (which would cost you $2,000) lowers your interest rate to 5.75%, resulting in a monthly payment of $1,167, saving you $32 a month. But since you coughed up $2,000 at the beginning, it’ll take you a little more than five years before you break even. If you plan on selling before then, points are a bad idea.

Rates versus APRs – Under most circumstances, forget about the APR (which stands for “annual percentage rate”)—just pay attention to the rate.

APR is a way to show the total cost of a mortgage over its entire life. APR takes into account the cost of the interest rate, but also the cost of any fees or points you paid when you first got the loan. It then expresses this total expense (interest+fees and points) as a percentage.

The problem is that those costs are being spread out over the life of the loan, and most people don’t hold on to their mortgage that long. If you cash out early, the points you bought are less beneficial and the fees aren’t spread out over as many months. That’s why most people can ignore the APR.

Want to Know More?

• How to Get a Mortgage .
• Advice on Getting a Good Deal.
• Questions to Ask When Shopping for a Mortgage .